Cocoaland Holdings Bhd
(March 3, RM2.38)
We reiterate our buy call on Cocoaland Holdings Bhd with a higher target price (TP) of RM2.68. We roll forward the basis for our valuations to the full-year 2017 (FY17) earnings per share (EPS) of 17.9 sen pegged to 15 times the price-earnings ratio (PER). We like Cocoaland for its stature as an exporter, the group being able to benefit from the weaker ringgit against the US dollar, a healthy balance sheet in a net cash position, and its dividend payout ratio of more than 50% that translates into an attractive dividend yield of 4.7%. 

Cocoaland’s revenue for this quarter increased by 6% year-on-year (y-o-y) from RM73.3 million in the fourth quarter (4QFY16) to RM77.7 million. This was due to a higher turnover for its Gummy products that was slightly offset by a decline in the beverage division’s revenue. Profit after tax (PAT) for 4QFY16 jumped 59.6% y-o-y. The surge in PAT was mainly driven by the decrease in selling and distributing expenses owing in part to lower petrol prices. The reinvestment allowance introduced in Budget 2017 lowered the effective tax rate for Cocoaland. Cocoaland’s contract manufacturing business involving its  gummy division recorded a higher sales volume which together with favourable foreign currency exchange movements that boosted export receipts, led to a good set of results.

On an annual basis, Cocoaland’s top line fell short of our expectations by 6.5%. However, group earnings surprised us, exceeding our estimates by 24.7%. The group’s total revenue of RM272.6 million for the full year 2016 (FY16) increased by 4.2% as compared with the total revenue of RM261.6 million in FY15. 

Moving forward, we expect PAT margins from Cocoaland to drop from the levels in FY16 as we believe that the cost savings from freight and forwarding charges will be difficult to sustain as petrol prices continue to gradually rise again. 

Feedback during a discussion session with Cocoaland’s management, suggests that gummy candy sales in South Korea, one of the group’s export markets, continue to enjoy strong growth in FY16. In China, currently the largest export market for Cocoaland, the group suffered a y-o-y drop in sales due to imitation Cocoaland gummy candy products in the market. However, the problem has been resolved according to management, as the imitation goods producer has been detained and since then, Cocoaland gummy candy sales in China have rebounded. 

Cocoaland has declared a first interim dividend of 10 sen with ex-date on March 14, 2017. Entitlement date is on March 16, 2017. The dividend yield and payout ratio will be at 4.7% and 52.2% respectively. — Inter-Pacific Research, March 1